Large construction or development companies should be paying attention as manufacturing and other large consumer-facing corporations struggle to address issues related to Environmental, Social, and Governance (ESG) issues. Most publicly traded companies in these sectors are somewhere in the journey of establishing ESG programs and implementing the related accounting and reporting mechanisms.
In particular, companies pursuing public-private partnerships (P3) may encounter unique ESG expectations or demands from public entities. From sustainability and sourcing commitments and labor practice specifications to environmental justice expectations, a company with a robust ESG program will be better equipped to credibly pursue and undertake P3 projects.
Unique ESG issues may arise in large development or infrastructure projects. Although the numbers are hard to parse (embedded carbon from construction activities is often combined with operational emissions from the built environment), construction activities worldwide account for a significant amount of greenhouse gas (“GHG”) emissions. As one example, concrete production and use alone is estimated to account for 4 – 8% of global GHG emissions. On the social impact side, large infrastructure projects often involve disputes over rights of way or land use conversion that give rise to environmental justice concerns (e.g., pipeline or transmission projects across native lands; easements or eminent domain actions in disadvantaged urban neighborhoods). The largest infrastructure projects can involve substantial land conversion and/or displacement of people. Companies seeking to affirmatively manage such issues would be well-advised to start their own ESG journey.
What ESG is Not
Corporate ESG programs should not be viewed as a “check-the-box” exercise to satisfy shareholders, board members, or communities. Any effort that begins with that goal is a waste of corporate resources and will not provide lasting value to the organization.
As with any potential flavor of the decade (see, e.g., ISO standards, Environmental Management Systems), it is not productive to pick something “off the shelf” and just do it. Our experience is that anything “off-the-shelf” goes right back on the shelf once it is “done.” Likewise, be wary of any consultant claiming to provide a “plug and play” approach.
What ESG Can Be
A focus on ESG is, we think, better viewed as one potential management tool to understand and manage issues associated with a certain category of impacts or risks to an organization. For example, an ESG program, if properly implemented, can identify areas of unique vulnerability (e.g., environmental risks or social risks associated with company practices). In that light, an ESG program should focus on areas of risk unique to the given institution (corporation or government entity). A publicly traded company will want to be mindful of the reporting metrics employed by various rating services and any public disclosure requirements (such as the proposed SEC reporting rules in the United States). Those mechanisms will dictate program breadth and reporting mechanisms, but all organizations should enter an ESG process seeking to address areas of greatest potential threat to the given organization.
To make this more concrete (pun intended), any ESG journey should begin with an assessment of ESG risks and the establishment of goals and metrics. As an example, an organization undertaking large construction projects may perceive unique ESG risks associated with materials supply, focusing on everything from conflict-free sourcing and fair labor practices to use of sustainable materials. As noted above, other organizations may have unique challenges and opportunities with physical project execution and land use needing to address possible impacts to local or regional communities.
A thoughtful, well-developed ESG policy provides structure around these risk evaluations, prompting the identification of key issues, mitigation of risks and issues, and sustainable success by establishing metrics, goals, and both internal and external reporting mechanisms. If done well, implementation of an ESG policy will inform decision-making and ease project execution. If done poorly, it can get in the way of both.
Squire attorneys have substantial experience working with clients on developing and executing ESG strategies, including the crafting of ESG programs, developing ESG, sustainability, and environmental justice policies, and assisting with stakeholder engagement plans. More generally, Squire attorneys have worked all environmental aspects of large infrastructure project execution, from permitting and environmental review to regulatory and stakeholder outreach. From our experience, we know that the time to think about and manage ESG risk is before other stakeholders raise concerns.